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Economic growth will remain robust at an annual pace of around 1¾ per cent in 2018-19 thanks to stronger external demand, a rebound in tourism, robust business confidence and job creation. Cuts in business taxes and labour market reforms should further support investment and employment.
Despite reductions in business and capital income taxes, stronger economic growth and some spending restraint should help to bring the budget deficit below 3% of GDP. The fiscal stance is expected to be largely neutral, implying that further spending reductions will be needed to finance tax reductions in a sustainable way. To strengthen the economy’s growth potential and social outcomes, this should be based on structural reforms that reduce inefficiencies and non-priority spending, while preserving expenditure on education, training and infrastructure, benefitting lower-income households in particular. Plans to increase spending on training and improve the system are welcome in that respect.
Financial-sector vulnerabilities are limited, and in spite of relatively high and still rising public debt stress tests indicate that the banking sector is resilient. Less than 4% of loans are non-performing, credit conditions are favourable, and lending is rising faster than in other big euro area economies. Both household and business-sector indebtedness are increasing; the latter exceeded 70% of GDP at end-2016 compared to a euro area average of 63.5%. If this trend continues, it could make enterprises vulnerable to faster-than-expected interest rate increases.
Economic Survey of France (survey page)